17 March 2013

Europe Puts Its Faith in Blanche DuBois

By Walter Russell Mead

Bank runs in Europe? The EU made them a little bit more likely this
weekend, and as Cypriots stampede for the shrinking number of ATMs still
handing out cash on the island, Italians, Greeks and Spaniards are also
beginning to wonder if, with interest rates effectively at zero and
confused politicians running Europe’s bank systems, the mattress might
just be the safest place for their money after all.

Monaco was once famously called a sunny place for shady people;
Cyprus deserves that description today. The Greek chunk of the island,
target of the latest flawed European bailout plan, runs what is easily
the shadiest banking system in the Eurozone. Russian oligarchs use the
island’s banks as a combination piggy bank and money laundry, and partly
as a result the island’s financial system is larger and more complex
than a small island economy would normally need. Largely because the
Cypriot bankers invested lots of their clients’ cash in Greek bonds, the
financial system is underwater, and the IMF, ECB and the other usual
suspects have tried to figure out what to do.

By the world’s post 2008 standards, the €13 billion that Cyprus needs
is chump change, and with four bailouts down, the EU has world’s most
experienced national bailout team on the payroll. So Cyprus should have
been easy, but this time the financial wizards had a problem. German
taxpayers have a strange prejudice against bailing out Russian
oligarchs, and to back a bailout of the banks in which depositors got
their money paid in full is political suicide in the land of the currywurst.

Since no bailout can go forward without a big fat check from
Chancellor Merkel, a woman who never forgets she faces elections this
year, the authorities decided to do something different. In
an unprecedented move, the EU decided that this bailout will be
partially funded by a tax levied directly on very large deposits that
sit in the banks. The NYT has more:

Under an emergency deal reached early Saturday in
Brussels, a one-time tax of 9.9 percent is to be levied on Cypriot bank
deposits of more than 100,000 euros effective Tuesday, hitting wealthy
depositors — mostly Russians who have put vast sums into Cyprus banks in
recent years. But even deposits under that amount would be taxed at
6.75 percent, meaning that Cyprus’s creditors will be taking money
directly from pensioners, workers and regulator depositors to pay off
the bailout tab.

Nobody has much sympathy for the oligarchs caught in this trap, but
there’s been a lot of publicity about the poor, innocent Cypriots who
will be taking a haircut. Via Meadia is not as sympathetic as
we’d like to be. Any sentient depositor in a Cypriot bank had to know
that things weren’t right. The dubious nature of the Cypriot banking
system has been a notorious fact for almost a generation; during all
this time Cypriots seemed perfectly happy that their country was running
an offshore money laundry for some of the nastiest people around.

Furthermore, the Germans have made no secret of their hatred and
loathing of the idea of bailing out kleptocrats with public funds. Smart
Cypriots took their money out of these casinos months if not years ago;
there is no right to make stupid decisions and have the world bail you
out. It’s harsh, and we would rather see people spared such pain, but
ten percent seems like a reasonable tuition payment for some very
important life lessons: don’t let your country’s financial system turn
into a notorious international sinkhole, and don’t sit passively as
disaster approaches, trusting as Blanche DuBoiswould say to the kindness of strangers.

That said, European financial markets could be more interesting than
usual this week. The European financial authorities are swearing up and
down that they will never, ever do anything like this again and that the
rest of Europe’s banks are as sound as the euro itself, but that of
course is exactly what they would say if they were planning to take much of your money away.

If enough Europeans think enough like Blanche, the next week will be
calm, but on Monday and Tuesday especially, the world’s attention will
be riveted on southern Europe, hoping its bank customers think like
Blanche and assume come what may that the kindness of strangers will
bail them out and keep them whole.